PURPOSE:

On January 3, 2007, the Supreme Judicial Court [SJC] decided the case of Fleet National Bank v. Commissioner of Revenue, 448 Mass. 441 (2007) [ Fleet]. The Court determined that the Department's method of calculating interest on refunds paid pursuant to certain abatement applications filed on or after July 1, 2003 was incorrect. This TIR explains how the Department will implement the Fleet decision. This TIR supersedes any public written statements to the extent they are inconsistent.

BACKGROUND:

The Fleet case involved two taxpayers, the Estate of Fournier and Fleet National Bank, both of which contended that that they were not paid the proper amount of interest on abatements granted by the Department on overpayments of taxes made prior to July 1, 2003. The taxpayers argued that because they had overpaid their taxes prior to July 1, 2003, calculation of interest was governed to an extent by G.L. c. 62C, § 40 as in effect prior to an amendment of that statute, even though the abatement application was filed after the effective date of the amendment, which had both reduced the rate amount of interest due on abatements and changed the date from which interest was to be calculated. [1] The Department, on the other hand, argued that the later version of the statute fully governed if an application for abatement was filed on or after the effective date of the amendment, and calculated interest in accordance with the amended version of the statute. For reasons discussed below, the SJC agreed with the taxpayers.

THE LEGAL FRAMEWORK:

General Laws c. 62C, § 40, governs the refund of taxes, interest, or penalties when a taxpayer has made an overpayment to the Department of Revenue [DOR]. Prior to July 1, 2003, G.L. c. 62C, § 40 read in part:

(a) If any refund of any tax, interest or penalties is made pursuant to [G.L. c. 62C, § 36], the state treasurer shall repay to the taxpayer the amount of such refund with interest thereon at the rate established under [G.L. c. 62C, § 32], except as hereinafter provided, from the date of overpayment . . . .

Id.(emphasis supplied). An overpayment of taxes occurred on "the due date of the applicable return without regard to extensions, or date of receipt of the overpayment, or the date of filing of the return, whichever [was] later, to a date no more than 30 days before the issuance of the refund." 830 CMR 62C.33.1(7)(b) (2004); see also TIR 03-18. Interest on a refund of an overpayment was paid at the Federal short-term rate determined under section 6621(b) of the Internal Revenue Code, as amended and in effect for the taxable year, plus four percentage points, compounded daily. G.L. c. 62C, § 40(a), G.L. c. 62C, § 32(a); See 830 CMR 62C.33.1(7)(a).

In 2003, the Legislature amended G.L. c. 62C, § 40 to provide that

[f]or purposes of this section, the term 'date of over­payment' shall mean the later of the date when the commissioner shall have received a properly completed return and full payment of the tax due thereon, or the date when the commissioner shall have received a completed and substantiated written application for abatement filed in accordance with this chapter, and any supplemental information requested by the department from the taxpayer in support of such application.

G.L. c. 62C, § 40(a), as amended by Stat. 2003, c. 26, § 197 (emphasis supplied). [2] In implementing this amendment, DOR took the position that "[f]or abatement claims filed on or after July 1, 2003, interest will be calculated on any tax, interest or penalty refunded from the date of receipt of a completed and fully substantiated abatement application." See 830 CMR 62C.33.1(7)(c). DOR thus interpreted these changes as fully applicable to any abatement application filed on or after July 1, 2003, the effective date of the statute, regardless of whether the date of filing of the original return or the date of payment preceded that date.

THE FLEET DECISION:

In Fleet, the SJC determined that DOR's interpretation applied the statute retrospectively to certain abatements where, under the law in effect before the statutory change, the overpayment was considered to have occurred before the effective date of the change. [3] The SJC, however, concluded that retrospective application of the statute was not appropriate. Pursuant to the SJC's analysis:

    1. Whether a statutory enactment applies prospectively or retrospectively is a question of legislative intent, see Moakley v. Eastwick, 423 Mass. 52, 57 (1996), and, as a general matter, "all statutes are prospective in their operation, unless an intention that they shall be retrospective appears by necessary implication," except those regulating practice, procedure and evidence, i.e., "those relating to remedies and not affecting substantive rights." 448 Mass. at 448-49.
    2. While the above rule is "easily enunciated, the distinction between legislation concerning "substantive rights" and legislation concerning "only procedures and remedies" is more difficult to draw. City Council of Waltham v. Vinciullo, 364 Mass. 624, 626-627 (1974).
    3. The amendment to G.L. c. 62C § 40 was not procedural but "[i]nstead . . . extinguished an existing substantive right, namely the right of a taxpayer to be repaid a refund, with interest thereon, for the overpayment of taxes from the time of such overpayment, rather than from the date of the filing of an abatement application, which could occur substantially later than the overpayment." 448 Mass. at 450.
    4. Because such a statute only operates prospectively absent an explicit pronouncement from the Legislature to the contrary, the 2003 amendment is to be treated as having only prospective application.

CALCULATION OF INTEREST UNDER THE FLEET DECISION:

In Fleet, the SJC determined that interest on the overpayments at issue should be calculated as follows:

  • For periods prior to July 1, 2003, interest would be determined under the rules in effect prior to that date, and thus would be payable from the due date of the applicable return without regard to extensions, or date of receipt of the overpayment, or the date of filing of the return, whichever was later, to July 1, 2003, calculated in accordance with G.L. c. 62C, § 40, as in effect prior to July 1, 2003.
  • From July 1, 2003 to the date of the filing of a completed and substantiated application for abatement (in accordance with the new rule of G.L. c. 62C, § 40(a), quoted above), no interest will accrue.
  • From the date of filing of a completed and substantiated application for abatement, interest will be calculated in accordance with § 40, as amended.

DOR will apply the same rules in calculating interest for those taxpayers that have overpayments affected by the Fleet decision.

EXAMPLE:

Taxpayer A timely filed her income tax return for 2001 and paid the tax shown as due thereon on April 16, 2002. On April 1, 2004, she filed a completed and substantiated application for abatement, seeking a refund of an overpayment of $100. DOR verified that Taxpayer A had overpaid her 2001 taxes by $100, and refunded Taxpayer A $110.15 by check dated October 30, 2004. The refund check included interest through September 30, 2004, determined as follows:

$8.27 compound interest on $100 per G.L. c. 62C, § 40 (as in force prior to the 2003 amendment) for the period April 16, 2002 through June 30, 2003.

$1.88 simple interest on $108.27 per G.L. c. 62C § 40 (as amended) for the period April 1, 2004 through September 30, 2004.

The refund check therefore includes total interest of $10.15.

APPLICABILITY:

The rules stated herein will be applied only to those taxpayers who have, or (due to a Federal Change under G.L. c. 62C, § 30 or otherwise) will have, pending abatement requests based on an overpayment (as defined in G.L. c. 62C, § 40 as in effect prior to July 1, 2003), that occurred prior to July 1, 2003. The Fleet decision does not revive a taxpayer's ability to file for an abatement if the applicable statute of limitations has expired. Parties who made overpayments on or after July 1, 2003, are fully subject to the new interest rules established by G.L. c. 62C, § 40 as amended and 830 CMR 62C.33.1.



/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:MTF:rl

May 16, 2007

TIR 07-8



[1]Fleet National Bank contended that it was entitled to interest under prior law on an overpayment for periods prior to the effective date of the statutory change in question - July 1, 2003 - but conceded that after that date, interest would accrue under new law only for periods after the date of filing a fully-substantiated abatement application. By contrast, the Estate of Fournier contended that it should be entitled to interest for all periods. As described below, the SJC adopted the approach asserted by Fleet National Bank.

[2]In addition, pursuant to the amendment, interest on a refund of an overpayment was reduced to the Federal short-term rate, "plus 2 percentage points, computed as simple interest." G.L. c. 62C, § 40(a), as amended.

[3] The Commissioner argued, inter alia, that interest calculations were not based on a retroactive application of the 2003 amendment because when the statute became effective on July 1, 2003, the only action that had been taken by the taxpayers was the payment of taxes and such payments did not confer on the taxpayers any right to the recovery of interest, which accrued only on the allowance of a refund by the taxing authority.